Section 44AB of the Income Tax Act gives the provisions relating to the class of taxpayers who are required to get their accounts audited from a chartered accountant. This audit aims to ascertain the compliance of various provisions of the Income Tax law and is called a Tax Audit.
The auditor is required to give his observations in an audit report, which may be in Form Nos. 3CA/3CB and 3CD.
The following business will have to get themselves audited under the Income Tax Act.
1. Gross Receipts of Business > Rs. 1 Crore or Rs. 5 Crore
a) Tax Audit will be applicable for any business entity whose total sales turnover or gross receipts in a previous year exceeds Rs. 1 crore (except if they are declaring income under section 44AD/44AE and other such sections for presumptive income)
b) However, for the person defined in "a" above, if the aggregate cash receipts from sales in a year, and the aggregate cash payments for expenses in a financial year do not exceed 5% of the total sales or total expenses, respectively, then the turnover threshold for tax audit is Rs. 5 crore.
2. Gross Receipts of Profession > Rs. 50 lakhs
Tax Audit will be applicable for a professional whose gross receipts from profession in a previous year exceed Rs. 50 lakh.
Professions include those lines of business as specifically covered under section 44AA(1):
- legal
- medical
- engineering
- architectural
- accountancy
- technical consultancy
- interior decoration
- any other as may be notified under such section
3. Less than 6% or 8% of Gross Receipts shown as Taxable Profits for Business u/s 44AD (when Turnover exceeding Rs. 1 crore but not exceeding Rs. 2 crore)
In case an eligible assessee engaged in an eligible business has a turnover above Rs. 1 crore in a previous year, and has taken the option of showing his taxable business profits on presumptive basis u/s 44AD, then:
(i) The presumptive taxable income is minimum 6% of the gross receipts of the year, for receipts through the banking channel only such as through bank transfer, account payee cheque or account payee bank draft. For receipts through cash and bearer cheque, etc., the presumptive taxable income is minimum 8% of gross receipt - in this case, tax audit is not applicable.
(ii) However, if such business as covered u/s 44AD declares a taxable profit less than 8% or 6% of the total turnover or gross receipts of any previous year on account of such business, then the same shall be covered under tax audit.
Section 44AD does not apply to persons earning commission incomes or brokerage or engaged in agency business. Further, it does not apply to person in the business of plying, hiring goods carriages as covered separately in Section 44AE.
If an eligible assessee opts out of the presumptive taxation scheme, he cannot choose to revert to the presumptive taxation scheme for a period of five assessment years thereafter.
4. Presumptive Tax for Professional under Section 44ADA
In case of a resident assessee who is engaged in a profession referred to in Section 44AA(1), such as that of legal, medical, engineering, architectural, accountancy, technical consultancy or interior decoration and whose total gross receipts do not exceed Rs. 50 lakhs in a previous year, then he has the option to declare minimum taxable profit from such profession as 50% of the total gross receipts of the year.
However, if he declares lower than 50% of such receipts as income and his income exceeds the amount which is not chargeable to tax, then tax audit would be mandatory.
5. Presumptive Tax for Plying, Hiring, Leasing Goods Carriages (44AE)
If a person who is in the business of plying, hiring, leasing goods carriages and does not own more than 10 goods carriages at any time during the previous year, he has the option of presumptive taxable income as follows.
(i) For Heavy Goods Vehicle (HGV), taxable income will be computed at the rate of Rs. 1,000 per ton of gross vehicle weight for every month or part of a month during which the HGV is owned by taxpayer.
(ii) For vehicles other than HGV, income is computed at the rate of Rs. 7,500 for every month or part of a month during which the goods carriage is owned by taxpayer.
However, if the person shows taxable income lower than as computed using these presumptive rates, then tax audit will be applicable.
Similarly, if the income declared is less than the presumptive rates as given under Section 44BB for Business of Exploration of Mineral Oils or under Section 44BBB, which applies to Business of Civil Construction by Foreign Companies in Turnkey Power Projects, then tax audit shall apply.
